Denmark’s PFA Earns $8.5 Billion in Year’s First Three Quarters

Danish pension PFA reported record returns of DKK57.3 billion ($8.5 billion) for the first three quarters of the year with the total return related to the market rate environment at 10.5%.

The pension, which is Denmark’s largest commercial pension company with 1.3 million customers, said the first three quarters of the year have been marked by extremely favorable conditions for the financial markets. During the third quarter alone, the total return grew by DKK17.6 billion.

“2019 have turned out to be a very good year for pension savers, who have gained on both swings and roundabouts,” PFA CIO Kasper Lorenzen said in a release. “We have seen dropping interest rates and a bond market that performed well simultaneously with the equity market roars ahead. Also, properties and alternatives have yielded strong returns, making this a year where everything seems to form a synthesis.”

All asset classes contributed positively to the portfolio’s returns for the first three quarters of the year, led by listed equities, which returned 18.8% thanks to significant exposure to US equities. This was followed by alternative investments, bonds, and real estate, which returned 8.6%, 5.8%, and 4.1% respectively during the same time period. The fund said falling interest rates resulted in solid returns for all bond types, particularly corporate bonds, which it said have benefited from the global low interest rate environment.

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Despite the strong returns, Lorenzen cautioned that the situation can easily change.

“Looking back just a year, the situation was completely different with worries of a significant downturn on the financial markets being imminent,” he said. “With the unrest that has characterized the past years, things may turn around quickly, and, therefore, it is important not to get speed-blind when things are going well.”

PFA said the outlook for the rest of the year has brightened up, and the “dark clouds” it saw at the beginning of 2019 have dissipated a little. It said that central banks in the US, Europe and Asia have lived up to market expectations with additional rate cuts, while the trade war between China and the US is “somewhat on hold.” The fund also said the US economy is promising as it has a high level of demand and continued low unemployment.

The fund said, however, there are also risks that could create a dimmer picture, such as declining growth in China and Europe. It also noted the political uncertainty concerning Brexit, which it said will continue to be a cause for concern on the financial markets for a long time.

“It is difficult to say for how long the positive trend we have seen this year will continue because we are still in a borderline territory, where negative surprises may easily tip the balance and revive the fear of a recession,” said Lorenzen, who emphasized that it now owns more than DKK100 billion in unlisted investments. “This ensures diversification of risk, which we also believe will generate value in the long term.”

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Tags: Denmark, Kasper Ahrndt Lorenzen, Pension, PFA

Pension funds, sovereign wealth funds, and the like are still shaking off the dust from the great financial crisis a decade ago. But they’re steadily increasing their allocations to equities as funding shortfalls necessitate higher returns, and consequently more risk.

Database provider Wilshire Trust Universe Comparison Service calculated that public pension plans had increased US equities to 47.3% of their allocations, as cited by The Wall Street Journal.

So far it seems to be paying off for investment managers, as the stock market continues to hit records day after day. US equities rose 1.23% for the third quarter and 2.95% for the year, according to Wilshire, while the remainder of the world continues to show signs of decline as international equities fell -1.80% and 1.23%, respectively, during the same periods.

“They are looking for risk and finding it in the equity market, and historically they have been benefiting from that,” Managing Director Robert J. Waid told the WSJ. “The concern is going to be when and if that changes.”

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“The significant decline in interest rates boosted performance of bonds and other interest rate sensitive assets, including defensive equities during [the] third quarter. Despite strong year-to-date performance, the sell-off in global equities during [the] fourth quarter 2018 is weighing on the trailing one-year performance for most institutional plans,” said Jason Schwarz, president, Wilshire Analytics and Wilshire Funds Management.

The migration to US equities isn’t ubiquitous, however. One of the country’s largest pension plans, the New York State Common Retirement Fund, signaled that it was looking to change its investment strategy from equities to bonds. Chief Investment Officer Anastasia Titarchuk announced that the fund commissioned an asset allocation study that could potentially call for a decrease of several percentage points in the fund’s allocation to equities.

Wilshire’s study also discovered that large endowments and foundations continued significant alternatives exposure for the quarter, increasing to a median 51.03%.

Equity allocations have been all over the place recently, to little surprise. Super high valuations in domestic markets, coupled with anxiety and cautiousness about another looming recession, alongside failing international equities, has helped to propel the current situation. The UK’s largest corporate pension funds reported for the first time they’re investing less than 20% of their portfolios in equities.

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Tags: allocations, domestic equity, Equities, growth, Pension Funds, portfolio